Albert Edwards, the Société Générale strategist who forecasts the S&P 500 will fall 75 percent from last year’s record high, says he’s re-thinking one of his central investment theories.
He introduced in 1996 his “Ice Age” thesis that advised investors to put money into bonds and be cautious with stocks as deflationary pressures like those seen in Japan spread throughout the world. Japan has been struggling with one recession after the next since its economic bubble collapsed in the 1990s.
Now that the Bank of Japan is paying negative interest rates on some kinds of deposits — basically penalizing financial institutions for parking cash there — he wonders how whether Japan’s government bonds can rally much higher. Bond prices move in the opposite direction of interest rates.
Japanese bonds have been “probably the most fantastic investment of the last decade,” he writes in a Feb. 25 report obtained by Newsmax Finance
. Japanese 10-year notes have risen 80 percent in the past 10 years.
“I’m now in the process completely rethinking my Ice Age investment thesis,” he writes, pointing to 10-year Japanese government bonds that have record low interest rates of negative 0.06 percent
and Switzerland’s 10-year paper hitting 0.5 percent.
He wonders whether rates can go deeper into negative territory, especially if they threaten the stability of the global financial system.
Edwards points to an article by Edward Chancellor at Breaking Views
who argues that negative interest rates “undermine bank profitability, threaten the stability of bank liabilities, force households to save more and discourage credit creation.”
If the U.S. adopts negative interest rates
, then bondholders can look forward to a significant rally ahead for 10-year Treasurys.
“If in one year that same note (then a nine-year) trades at minus 0.32 percent (down 200 basis points) then the T-note will have delivered a total return of 19 percent,” he writes. “Not bad indeed!”
Meanwhile, he’s still pessimistic about stocks, especially if “the U.S. would lead the global economy back into recession at some point – I think sooner than most expect.”
Edwards repeated his forecast that the S&P 500 stock index will drop 75 percent from its record high to a low of 550. The benchmark has fallen 4.4 percent this year to about 1,953 as oil prices slumped
to 13-year lows and investors worried about slower economic growth in China.
“I haven’t changed my view on that at all and look forward to the opportunity of buying lots of cheap equities in the months and years ahead,” he writes. “But it is our overweight long bond position that has me a bit flummoxed.”
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